I see that AACC has gone down and continues to drop. Does anyone knowwhat the deal is with this? I know one blogger mentioned that peoplebought this stock just for the dividends but when they realized thatthey had to be in a certain date to get this dividend, people eitherstarted dumping and/or panic selling, or whatever.

But in any case, I've really tried to do some research and find somenews on this company but haven't found anything. No press releases,nothing, except maybe a conference call coming up about how much thiscompany has gained or lost, I suppose.

If anyone out there knows anything, please feel free to post yourmessages. I would greatly appreciate any information.

Should I just sell this stock or just try to ride it out and hopefully break even later on? What are your thoughts?

I'm pretty new at stocks so any input or ideas are greatly appreciated. Thanks.

Purchases and collects defaulted or charged-off accounts receivable portfolios from consumer credit originators. Because of the recent news covereage (read concerns) about the sub-prime mortgage sector of the US economy this stock has been bruised and beaten. You'll have to decide on your own whether you think you should buy, hold or sell.

Hi, I posted this reply on the CAPS message board today and am posting it here as I'm interested in thoughts on my analysis of AACC's business.

I think AACC's business model is in trouble right now, thus the declining stock price. However, if they can make the right improvements in their operations and get things back on track, then the business could grow and an investment may be warranted. Right now, even with the low historical price, there is a lot of risk in this investment. Here are my thoughts...

A reason that the stock has declined so much recently may be because FCF as a percent of Revenue and Purchased Receivables Revenue as a percent of Cash Collections are both trending significantly downwards. For instance, in 2005 FCF was 35% of revenue, in 2006 it was 24% and in Q2 07 it was 18%. Purchased Receivables Revenue as a percentage of Cash Collections has gone from 80% in 2004 to 69% for the first 6 months of 2007. This has a big impact on the FCF returns that AACC delivers on the capital they invest in the bad-debt pools. Currently they are not able to generate returns on their bad-debt investments that can grow the business.

In the 2006 10K they estimate that their cash collections return 451% on the purchase price of the bad-debt they buy. The way I see it, if as an example, they invest $100 in bad-debt, they should on average collect $551 in cash. Currently they would realize about 69% of Revenue on that $551 Cash Collection, which would be $380, of which 18% would flow through to Free Cash, or $68. That's a -32% return of FCF on their $100 bad-debt investment.

Now in 2005 when they converted 80% of Cash Collections to Revenue and 35% of Revenue to FCF, that same $100 returned $136 in FCF, which is a very nice 36% ROI. This return allowed them to grow the business by purchasing larger quantities of bad-debt.

This probably explains why they needed to open the line of Credit with JP Morgan.

From Q2 07's earnings results I believe they're paying 3.4% of face value of the debt their purchasing, vs 3.59% in Q2 06, so it would appear that their margins, as they relate to the purchase price of the debt, are improving. It looks to me like it's the Operating Expenses, specifically the Collections Expense, and the Interest Expenses that's having the biggest impact on their margins.

Also, they talk a lot about the increased amortization rate on the Cash Collections, which is having the negative impact on their Cash Collections to Revenue conversion. I don't follow how they determine this exactly, but it's clear that it has a big impact on how much revenue they recognize.

I think they need to demonstrate the ability to generate positive FCF returns on the bad-debt investments, which could come from improvements in several areas:

Otherwise they will not be able grow the business as they will only be able to purchases smaller and smaller new bad-debt pools with cash from operations and will need to continually tap their credit facility to grow revenues. This will be a death spiral for the business.

The management team didn't explain it quite this way on the Q2 07 earnings call, but I sensed that there was an urgency about the improvements they're implementing because they know this business will not grow as it's currently performing.

not much help from my side as I do not have nearly as much info about this stock as I'd like to have. All I can say is the numbers in your post seem to make perfect sense to me. More importantly I would like to ask you if you have any interesting source of inforamtion about this stock other than the standard SEC filings(non-Fool boards etc.). I would like to find out more about the current situation and any help is really appreciated.

I don't have any real information other than what's publicly available, but there is some useful public information.

They list a downturn in the US Economy as a major risk to their business, because if personal bankruptcy rates go up, that usually is not a good thing for their collection abilty as their collection dollars are unsecured and it's usually the secured dept that is collected first. This may also be a factor in the current stock price.

A couple of other points that may be worth noting:

1) There hasn't been any real Insider buying reported in July and August, despite the big drop in the stock price. They have however issued a bunch of stock options to the management team. So theoretically they should be well incentivised to drive results, especially the new COO who recieved around 118K options in August.

2) The PE firm (Quad-C) that brought AACC public sold a chunk of stock in early July at $18 and change. They probably know a good deal about this business and chose a nice time to realize a return. They still own a lot of stock and have seats on the board, so if I'm right and the business model is in trouble they will be looking for ways to fix it.

It should be interesting to see how they perform in the next two quarters and specifically if they're able to make marked improvements in their operational efficiency that will hold for the long term. This is what I'm trying to determine, as I believe that's the decision point for a long term investment. There's certainly alignment with the management team, through stock options, and their investment partners to make this happen. I have a hard time saying that the company is undervalued until I feel confident that their business will be able to grow and generate returns over the next ten years.

Again, I'm interested in any thoughts on my comments here.

Lastly, there is some scuttlebutt about AACC's business practices on the Google Finance message board, but I tend to heavily discount that information.